WASHINGTON — The Federal Reserve announced several steps late Sunday to cope with the worst credit crisis in decades, including broadening the types of assets that investment banks can put up to get emergency loans from the Fed.
The action came as U.S. and foreign commercial banks were hashing out a plan to inoculate the global financial system against the possible failure of Lehman Brothers. Also, Bank of America Corp. agreed to buy Merrill Lynch &Co.
Besides expanding the types of collateral that can be used, Federal Reserve Chairman Ben Bernanke said the Fed would also increase the frequency of some of the auctions being used to get loans to banks from every other week to a weekly basis.
Bernanke announced the actions in a statement, saying they were being taken after a weekend of discussions with officials from the Treasury Department and the Securities and Exchange Commission and top executives of financial firms.
Those talks were aimed at seeing whether another financial institution would be willing to take over venerable investment bank Lehman Brothers and failing that, how other institutions could pool resources to protect the global financial system.
A group of global banks and securities firms announced late Sunday a $70 billion loan program that financial companies can tap to help ease a credit shortage that threatens global financial markets.
The ten banks, which include JPMorgan Chase &Co. and Goldman Sachs Group Inc., said they were committing $7 billion each for the pool. The pool would act as a signal to the marketplace that banks, brokerages, and other financial companies can lean on the fund to take care of borrowing needs.
The banks said the program will be available to participating banks which can get a cash infusion up to a maximum of one-third of the total size of the pool. The size of the loan program might increase as “other banks are permitted to join.”
All participating banks intend to use this facility beginning this week, the statement said.
The banks also include Bank of America Corp., Barclays PLC, Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, Merrill Lynch &Co., Morgan Stanley and UBS.
The Fed’s steps represented the latest in a series of actions the central bank has taken over the past year to try to protect the U.S. financial system from a credit crisis that erupted as a result of rising loses in subprime mortgage lending.
Also Sunday, Bank of America Corp. has agreed to buy Merrill Lynch &Co. for about $44 billion, or around $29 a share, according to The Wall Street Journal. A deal between the two big financial companies would lift the uncertainty that has shrouded Merrill Lynch since the start of the credit crisis a year ago.
Charlotte, N.C.-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world’s largest and most widely recognized brokerage. A combination of the two will create a global financial services giant involved in everything from fixed-income trading to stock underwriting to credit card lending, which will rival Citigroup Inc., the biggest U.S. bank in terms of assets.
Strategically, most industry analysts are saying it’s a good fit. If the deal goes according to plan, Bank of America will be able to offer Merrill’s retail brokerage services to its huge customer base. There is not a great deal of overlap between the two companies — Bank of America does have an investment bank already, but it has never been terribly strong.
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